The world we are facing is quite chaotic. We all know about the dynamics that are crashing upon our world, whether it’s inequality, or asset bubbles, unemployment, the recent election in the United States, lockdowns, the pandemic, currency wars, trade wars, negative rates, too much debt. There are a lot of topics that we can address and discuss, particularly if we want to understand what is transpiring in the world. What I want to suggest to you for a moment is going to sound somewhat controversial: that all of these dynamics are linked, that they are all connected by four key transitions that are underway in the world today.
The first transition is what’s happening in China. And in China, we have had a credit-fueled investment bubble that burst. When it burst, it left an overhang of too much capacity in areas such as steel, lead, copper, including construction workers, anything having to do with the investment-led side of an economy. So, that’s No. 1. By the way, the transition that is underway is that they are heading toward a consumer society. They are not completely there, but they are, in fact, gaining a lot of momentum in that direction. The part of the story that I want to share with you today is that there was this overhang, the credit-fueled investment bubble bursting, leaving too much supply.
The second transition underway is what’s happening with technology, something all of us are intimately aware of. The fact that I’m communicating to you virtually shows that technology has been adopted at an accelerating rate. And so, we know that technology is allowing us to produce more output with the same or even fewer inputs. The result is more supply.
The third transition that is underway right now is what’s happening in the domain of energy. We know that we have seen massive improvement in alternative energy, power storage and other green technologies. But we also, simultaneously with that, are having advancements in shale and fracking technologies that are enabling us to have more hydrocarbons. So, the result again here is more supply.
And the fourth transition that I want to emphasize and talk to you about is demographics. The world’s largest economies are all aging. The United States is aging. Europe is aging. Russia’s aging. China’s aging. So is Japan. And what we also know is that when people move to fixed incomes, they spend less. And so, that fourth transition I’m talking about, all else being equal, is about a reduction in demand.
Now, if we summarize what I’m talking about here, what we see is China exposing more suppliers, excess supply. Technology is showing us that there is more supply coming because we are able to produce more with the same or fewer inputs. Energy. Again, the advancements ― we are seeing more supply. And then, when we think about demographics and individuals moving to fixed incomes, what we are seeing is less demand.
So, if we put these all together, it shouldn’t shock us that there are, in fact, deflationary pressures. Now, why does that matter? Because if you pay any attention to what central bankers of the world are trying to do, you can see that they are trying to generate inflation. That is a really tough thing to generate when you have these headwinds. So, you might ask the question, why does deflation matter? Well, it matters on a bunch of different fronts.
The first one is currency war dynamics that are transpiring right now. Think about it this way: If there is too much supply for the amount of demand in the world, well then what happens is countries will start competing for the limited demand. Imagine your smartphone world, the smartphone industry. We know that there’s only so much demand for smartphones. Well, it turns out the Koreans want you to buy their smartphones. And, as a result, they want the Korean won to be priced more inexpensively than the US dollar. The Americans want you to buy the iPhone. And so, Apple wants the US dollar to be slightly cheaper. The Japanese might want in on this game, so the Chinese might want in on this game. The end result is a currency war dynamic where countries start using their currency to compete for that limited demand. And that creates interesting and funky dynamics but most visibly seen through currency wars where countries are competing to have their currency be cheaper.
The other thing that happens is, we find that this produces winner-take-all economies. And the result is greater inequality. Return on capital rises; return on labor gets pinched. I think inequality is a really problematic development. In fact, I might suggest even here that inequality could be the single most disruptive development of our time, of our age. But it shouldn’t surprise you, with these dynamics and this inequality, that, in fact, there are greater protectionism instincts on the part of political leaders, right? So, here the middle class is suffering. And, by the way, “here” can be any country around the world. Your middle class is suffering. The political leaders will say, “What will we do? We are going to actually prevent the others from competing with you for your jobs.”
And the “others” are those outside the country. Surprise, surprise ― trade wars, tariffs, protectionism implemented in the form of protectionist measures, whether it’s tariffs or even nontariff measures, permits, restrictions, subsidies, etc. Price floors, price ceilings ― I mean, there are a lot of ways that protectionism can manifest itself. And so, the end result of these dynamics is a world in which the citizens of the world have said, “You know what? All of you smart Ph.D. economists of the world who have suggested that we should focus on free trade, open markets, globalized interactions that that would raise the tide and all the boats would rise, well, that hasn’t been the case. In fact, I’m no longer interested in hearing about the globalization phenomenon. I’m no longer interested in this rising tide phenomenon. I don’t want to grow the pie. I want to focus on my slice. That’s what matters.”
There’s always been turbulence. This is not new. The problem with turbulence is not the turbulence. It’s how we think about it. And so, I’m going to leave you with this Peter Drucker quote, which is “The greatest danger in times of turbulence is not the turbulence; it is to act with yesterday’s logic.”
Dr. Vikram Mansharamani is a global trend-watcher who shows people how to anticipate the future, manage risk and spot opportunities. The author of two books, he has been a frequent commentator on issues driving disruption in the global business environment. Vikram’s ideas and writings have also appeared in Bloomberg, Fortune, Forbes, The New York Times and a long list of other publications. LinkedIn twice listed him as their top voice for money, finance and global economics and worth and has profiled him as one of the 100 most powerful people in global finance. Millions of readers have enjoyed his unique multi-lens approach to connecting seemingly irrelevant dots.
